| Abstract: | It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid-ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid-ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R2, are generally unaffected. Bid-ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low-priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid-ask spread component of transaction costs. |
